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The Employee Ownership Update

Corey Rosen

January 14, 2011

(Corey Rosen)

Eighth Circuit Adopts "Net Seller" Rule in Stock-Drop Case

In Brown v. Medtronic Inc., No. 09-2524 (8th Cir., Dec. 13, 2010), a circuit court ruled that an employee who sold stock at a profit lacked standing to sue even if alleged fiduciary violations in the offering of company stock in a 401(k) plan were true. The standard differs from an alternative approach that looks at what might have happened absent the breach, something the court said was too hypothetical. The net seller approach has not been universally adopted but has shown up in a number of cases. There can be important nuances to such cases. If, as here, the employee actually benefitted from the alleged fraud because Medtronic stock was artificially higher, the plaintiff's case seems weaker than, for instance, where profit sharing assets were moved into an ESOP, and the ESOP shares subsequently increased in value, but not as much as diversified investments in general did. In that case, the employee is still a net seller, but the alleged fiduciary violation made him or her worse off, not better.

Notably, however, the court declined to adopt the presumption of prudence assumption, saying that the strength of this presumption is "unclear" and that it was not as protective of fiduciaries as Medtronic argued.

Facebook Trades Catalyze SEC Review of Secondary Markets

The increasing interest in secondary markets for shares of closely held companies has prompted the SEC to take a closer look at these practices. Market makers such as SecondMarket and Sharespost do eBay-like auctions for purchases of shares from these companies, either from investors or, often, from employees. The secondary markets provide a way for employees to get some liquidity for equity awards they have exercised or been granted, although some companies restrict or prohibit sales on the grounds they want people to retain an equity interest. Companies that have assets of more than $10 million also want to be sure they do not end up with 500 or more shareholders and become de facto public companies. The market-makers typically charge a very high transaction fee, such as two to four percent, for each transaction.

The secondary markets raise a number of issues, including how potential investors can really know enough about what they are buying because so little information is public. With the recent Goldman Sachs creation of a special purpose vehicle to invest in Facebook, the 500-shareholder issue has also become more important because the vehicle only counts as a single investor even though the investment entity has multiple investors.

The SEC has not indicated what might come out of the regulatory inquiry. A good article from CNNMoney and Fortune can be found at this link.

ESOP Acquisitions

We are starting to compile a list of companies that ESOP companies have acquired in recent years. The list will eventually be used to give people who are doing this examples and for research on how ESOP acquisitions fare compared to acquisitions in general. If your company has done one or more acquisitions and is willing to let us know, please send me the year, the company acquired, and the approximate number of employees involved.

Another Large Staffing Company Becomes an ESOP Company

A second large staffing company has become almost 100% ESOP-owned. Burnett Staffing has almost 7,100 employees. The Houston-based company decided to become an ESOP after hearing about Penmac Staffing in Springfield, Mo., which has about 14,000 employees. Although both companies hire temporary employees, the plans are set up so that most of the employees will be in the ESOPs.

Principal Financial Best Practices Guide for Employee Financial Security Now Available

Principal Financial has produced a very useful booklet reviewing some of the best ideas of the 10 winners of the 2010 Principal Financial Ten Best Small and Mid-Sized Companies for Employee Financial Security. ESOP companies Clif Bar and RLI were winners this year. The awards focus on corporate health care, wellness, retirement, and insurance programs. The report is available at this link (PDF format); it also contains information for how to apply for the 2011 awards.

I have been one of the judges for several years and can confirm the process is a rigorous one but also one that provides applicants with a lot of good feedback.

2011 Conference Will Be Special

Early signs are that our 2011 annual conference in Denver on April 13-15 will be one of the biggest we have had but, more important, I think it will also be one of the best. We have added a number of new features, including a preconference session on wellness programs and more opportunities for the kind of one-on-one and small group interactions that make our meeting very different from typical conferences. It is also a special meeting in that it celebrates the NCEO's 30th year, and will be when my colleague Loren Rodgers steps in as the new executive director. I hope we will have a record turnout to welcome him. Details on the meeting are on our site.

Author biography and other columns in this series

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